Financial services sector needs to build trust in wake of crisis
Unjustified fears have undermined confidence in banks and leading companies, writes John Mulcahy.
Unjustified fears have undermined confidence in banks and leading companies, writes John Mulcahy. AUSTRALIA is keen to call an end to the world financial crisis. But it is too early for that. Concerns over subprime matters have been rapidly overtaken by oil and inflation fears. That is frustrating and puzzling for Australia's financial services sector and investors. They would argue that our sector escaped the damage incurred by others overseas, particularly in the US. They would also argue that there is no logical reason why shares in Australia's banks and other leading companies should be hit much harder than their US or European counterparts. Australia's national and company balance sheets do not seem to justify the fear so widely evident here. Two factors are stimulating this fear. The first is globalisation. Irrespective of the strengths we have in Australia, we are also subject to the weaknesses of the global economy. Our strengths enable us to weather the impacts of those weaknesses - but not avoid them. The second is lack of trust. I believe there are lingering trust and confidence issues for Australia's financial services sector. Our willingness to tackle those will assist Australia's management of the economic challenges we face. These include lower growth, inflation and continued sharemarket volatility. The measure of the quality of Australia's response to the subprime crisis has focused on our avoidance of financial market failure. We are also dealing with the expectations of millions of investors and borrowers. They are more interested in the impact on them than in the broader concept of market failure. It has been estimated that the fall in the Australian sharemarket at its lowest point during the crisis was equivalent to 7% of household net worth. The size of the fall was not the most contentious issue. It was the company and individual investor losses due to transparency and disclosure failings. They overshadowed the quality of the regulator and company response for many Australians. The share slump also coincided with interest rate increases. Since then, shares have continued to fall and superannuation fund returns are negative. There has been little to build confidence and trust in the ability of Australia's financial sector. We need to consider the personal context when we measure the success of our response to the subprime crisis and other issues. The Government and regulators are fully aware of that. They have announced measures to tackle what they see as areas of concern in financial markets. But the response should not be left to the Government and regulators. Financial institutions also need to consider areas for improvement. A starting point would be the trust and confidence issues that emerged during the subprime crisis. Risk management and trust are linked. Inept risk management by some international financial institutions was a leading cause of the crisis. A related factor was the effort to pursue yield and avoid risk by creating unduly complex financial instruments. These diminished the responsibilities of originators. They also created confusion about the identity of counter-parties. The Reserve Bank has noted that Australia's banks were more prudent in their risk management. Despite that, sensitivity about the quality of bank risk management continues. Globalisation causes a serious loss of trust in one international company or market to quickly flow to others, irrespective of their health. It leads to scepticism about local financial institutions' prospects. It also leads to calls for increased regulation without regard for the efficacy of existing laws. Ultimately, it comes down to trust. The subprime crisis has again raised the issue of government and community trust in the financial sector. Trust requires confidence. Confidence is built on demonstrated success and consistent performance. We need to ensure the pivotal role of our sector and its leading companies is better known. Risk and capital management should remain priorities. We need to be effective in our communication about that management. If we are sensible, we will also increase our recent disclosure and transparency efforts. Community education in financial matters is another priority. Australia's financial institutions protected Australia from the brunt of the subprime crisis. That is a message that needs to be consistently relayed. There should also be a renewed effort to strengthen the reputation of Australia's banks and insurance companies. We need to ensure we do not try to use regulation to eliminate financial risk. That is not a justification for regulation. Market failure would be a justification. Markets did not fail in Australia during the subprime crisis. Nor is there any prospect they will fail. The challenge is to ensure the community has trust in the market and its key institutions. Without that there can be no progress. We can demonstrate how achievements such as the quality of our subprime response are worthy of greater trust. John Mulcahy is Suncorp chief executive.